Are Stay or Pay Clauses or Contracts Legal?

Although the Department of Labor banned the use of noncompete agreements, their legality is still up in the air, what with the numerous challenges to the ban being brought through courts and with some courts upholding and some rejecting the ban.

But amidst all the uncertainty, many employers have looked for other ways to keep employees, or at least to make it harder for them to pick up and leave to work for a competitor: agreements which are commonly known as stay or pay agreements.

What is a Stay or Pay Agreement?

A stay or pay agreement is an agreement where an employee agrees that if the employee leaves the company, the employee will owe the employer money.

Sometimes, there is a time frame set out, after which the employee won’t owe any money, and other times there is no time frame. Sometimes, the employee will owe the costs and expenses incurred by the employer in connection with training or onboarding the employee, and other times the fee is just a random (sometimes rather punitive) amount.

Some Don’t Like Them

Critics of stay or pay agreements have said that they amount to nothing more than a sword to wield over employees, and that these agreements are just illegal noncompete agreements, under a different name. Many have noted that these agreements have been used to punish employees who may have little money, to coerce them to stay in or at jobs they don’t want to work at.

The Government’s Opinion

The government had previously said that these agreements might be treated the same as noncompete agreements in their eyes, thus potentially subjecting a business who uses them to significant fines and penalties. The government says that the National Labor Relations Act may see these clauses as chilling employment or employee movement, or that they increase fears of termination, and thus, they may be illegal.

That said, there are no reported Florida cases that make these clauses legal or illegal, so it’s uncertain whether their use is permissible.

Conditions for Enforceability and Legality

Some courts around the country have said that stay or pay contracts could be legal, if there is sufficient consideration on both sides, if the repayment amount is reasonable, and grounded in some reasonably incurred employer expense.

The stay or pay clause should also be voluntary. So, requiring it as a condition of employment may be illegal. But giving an employee or prospective employee the option to undergo additional training, or get some other benefit in return for agreeing to the clause, which the employee could decline (and still keep her job or get hired), may be permissible.

Additionally, the clause should not apply if the employee is terminated for no cause (such as, for example, mass corporate layoffs).

Questions about the legality or enforceability of your employment contracts?  Let the West Palm Beach commercial litigation lawyers at Pike & Lustig help you with your contracts and agreements in your business today.

Sources:

nlrb.gov/news-outreach/news-story/general-counsel-abruzzo-issues-memo-on-seeking-remedies-for-non-compete

mondaq.com/unitedstates/employee-rights-labour-relations/1530018/nlrb-ramps-up-fines-for-employers-using-stay-or-pay-noncompetes